How To Avoid ICO Scams: Understand Money

With the growth of digital cash, and with large volumes of money existing in the form of financial contracts, it can be easy to forget the roots of the nature of money. In the modern day of ICO scams and artificial intelligence, we will be better off by having an ounce of “hard money” conservative outlooks on money. Having Initial Coin Offerings (ICOs) of their own custom cryptocurrency can be a viable form of fund-raising for many start-ups, and as well as many scams. This can lead many people to become skeptical about cryptocurrencies as a whole.

Although they are mostly full of scammers and under-developed projects, the quality and legitimacy of ICO-based funding is only going to increase around the world, as public adoption of the technology grows. In such an era, people have to go back to the roots of one of the most significant, primordial human collective invention: money.

What is Money?

Money, its a hit!

In the earliest days of human civilization, barter was the common way to exchange value. The needs were few, so direct exchange made the most sense. But transportation and the specialization of labor changed everything. People needed to have a relatively stable standard unit of exchange that anyone can trust. A new product emerged from society – money. People generally agreed to use objects to represent value, through organically grown faith in the integrity of those objects. In human history, this object was usually gold or silver. Currency distills the essence of value generation, and makes it possible to store and reuse it consistently. As a fundamental tool to humanity, akin to technology, money fills an integral role in society. This becomes more obvious as we dig deeper.

An objective store of subjective value

The purpose of money is to store the value. People assign value to goods and services subjectively. Supply and demand determine the prices. Price acts a signal to suppliers and consumers on how much to produce and buy. The price of a good or service in a particular currency, represents its perceived value at that time. Money stores this generated value, for use at a later time. A currency that grows in value is lucrative for savings, as it presents an opportunity for growth.

A medium of exchange

People store value only if they can expect to exchange it for goods and services. People would not store the value of their labor into a currency if they did not think it had any value. Alternatively, if a currency gains value over time, people will prefer to get paid in it. But the central aspect of gaining value, is being accepted.

A product

As of May 2016, the international money markets trade a total net work of $5 Trillion. Because the money’s supply and demand is different in each country, the relative prices between countries fluctuate. Any place or business that accepts all currencies at once will notice the efficiency of each currency to buy things vary over time. Another example is the cryptocurrency market. Despite there being thousands of equally accessible clever products, fewer than five cryptos account for most of the transacted volume. If you have an option to buy products with any kind of money, you will choose the money that gets you the most output, from the least of your efforts. Some people can tolerate more risk than others, and would accept currencies with short-term value. Others may prefer to have a savings instrument for the long term.

This reflects a fundamental feature of money that is not always obvious: money is also a product, subject to the laws of supply and demand. A product whose customers demand features like stability, divisibility, portability, and uniformity. In an environment with many currencies, people would shop around with their skill and labor for the right currency to rely on store their value into. Much like people shop around with their money to buy the best clothing for the money.

Economist Murray Rothbard writes the following about privatization of currencies in his famous book What Has Government Done To Our Money:

“We are used to thinking of coinage as a ‘necessity of sovereignty.’ Yet, after all, we are not wedded to a ‘royal prerogative’ and it is the American concept that sovereignty rests, not in government, but in people. How would private coinage work? In the same way, we have said, as any other business. Each minter would produce whatever size or shape of coin is most pleasing to his customers. The price would be set by the free competition of the market.”

Why is studying money so important on the Internet?

You cannot afford to not understand money, but understanding money can help you greatly

On the Internet, ignorance hurts, and knowledge pays – both more so than in the regular world. In the real world, people typically use their national currencies. Hardly anyone would really know what causes the value of their own currency to be set or to vary. The USD is created by the Federal Reserve. A PEW study conducted in 2014 found that almost 76% of the surveyed people could not name the chairman of the Federal Reserve. Even fewer probably understand how exactly it works.

With digital cash, you have the opportunity to invest your savings in some very interesting concepts and reaping more financial reward than through a bank. For example, Bitcoin’s value doubled nearly 22 times since 2009. Thats means that if they had put $1 in BTC in 2010, it would have been worth $6M at the peak of 2017.

But this also means that you cannot trust every new form of “cash”, like you would your national currency. Special study and care must be taken for every new venture.

Corporate coins = money + stocks

The way ICOs work is by selling units of value as “shares” of a company. These units have value of their own, and also become a medium of exchange – or that is how it is sold. A real world analogy would be buying stocks of Apple, and then using those stocks at a grocery store to buy actual apples. It is unclear at this time, whether the cryptocurrencies will fund companies, or if company names would justify the coins. If an adopter intends to use the tokens as more than an investment in a company, they have to look deeper.

It is not enough that the crypto can facilitate transactions, and thereby simply become a medium of exchange. Some investors should be wary of ICOs if they cannot also see it as a savings instrument. If the parent company is simply churning out a valueless coin, then the market will respond accordingly. The overall value of the coin can only expect to drop. This makes it a bad savings instrument. And contribute to a positive feedback loop of lowering price and liquidity.

Therefore users using and holding tokens to fund ideas of companies they trust, is fine and is a positive act. But things change if user expect to use these tokens as money or in exchanges, and not just as proof of company share ownership. At that point, the adopters have to be extremely critical of the cryptocurrency they support.

Scammers exploit non-technical, faith-based investors

Although this point isn’t specifically relating to money, this is a similarly important concept. Company coins serve as holding stocks of a business and as an exchange currency. As a result, a main skill that online investors need to pick up is the ability to asset value of a business. This is not an easy task. ICO scams occur at too big a scale for comfort. A Vietnamese company stole $660 Million of voluntarily donation, through an exit scam. About $22 million USD was roughly stolen within the year. The Merkle even reports that nearly 81% of all new ICOs are scams.

The key thing to note here is that all of the donations were voluntary. Here are some common traits among scam ICO projects:

Use of a mixture of vague phrases and complex technical jargons, when describing what they do.

Advertising an unusually high return on the coin holdings.

High marketing expenses.

Emotional arguments more than sound financial plans.

Fund-raising for a future plan, and not any ongoing projects.

Many of these tactics are immediately obvious to fundamental financiers, and hard money fans.

Conclusion: Be proactive and critical when judging ICOs

There are a few things investors can do before embarking on a new cryptocurrency investment adventure. With some precarious steps, you can avoid ICO scams, and potentially get rewarded for your savings. If ever encountering a new ICO:

Always ask for a whitepaper. All purposeful cryptocurrencies will have a clear technical structure and mechanism. A cryptocurrency without a unique whitepaper, is like a house without a roof.

Understand the whitepaper. Or hire a consultant (like Bawdrate, for instance) to help you understand a new whitepaper. Most cryptocurrencies are designed so that the users need not bother with the technical details. Long time investors, however, have to understand what they are buying.

Ask the fundamental question: does it add value? Is it just a fork of an existing project? What real world problem does this coin solve, and are those problems worth solving? Would most people pay to solve those problems? These are all questions that have to be answered before investing.

Research the background of the creators of a new cryptocurrency. In a lot of the cases of new ICO developers, their absence from online circles is usually a first sign of an exit scam, like Savedroid.

Think about the market for the coin. Are you investing in a token for a micro-market? The smaller the segment of the overall market the currency has, the more it makes sense to use it as a stock rather than a savings instrument.

By following a few conceptual notions from economics, and by using some common sense, it is possible to get the most from the dawn of ICOs. There are genuinely good products out there that need funding. Be proactive and have fun.

Check out our continually modified reading list for improving your fundamentals of money and its connection to cryptocurrencies:

The Denationalization of Money, by Friedrich Hayek

Rethinking Money: How New Currencies Turn Scarcity Into Prosperity by Bernard Lietaer and Jacqui Dunne